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Reconciling the opposite conclusions recited by two district courts on essentially identical facts, the U.S. Court of Appeals for the Federal Circuit has clarified when a litigant is under a duty to preserve documents at risk of committing spoliation.Micron Technology v. Rambus, Inc., Case No. 09-1263 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part); Hynix Semiconductor, Inc. v. Rambus, Inc., Case No. 09-1299; -1347 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part, joined by Newman, J.). In these cases, the Federal Circuit concluded that Rambus improperly destroyed millions of pages of documents in advance of litigation, handing the technology licensing giant a major setback in its patent enforcement program.

Rambus licenses patents that relate to enhanced performance memory chips. Most of Rambus cash flow is from patent licensing revenue. Rambus initiated its first enforcement action in 2000, slightly before Micron and Hynix initiated declaratory judgment actions against it, seeking declarations of invalidity, non-infringement and unenforceability. In advance of its enforcement actions against Micron or Hynix, Rambus, in 1999, conducted what has been termed “shred days” or a “shred party,” during which millions of pages of documents were destroyed. In the Micron case, the district court (Delaware) concluded that Rambus had engaged in spoliation of documents that related to its patent licensing program and ordered dismissal of the action against Micron as a sanction. The district court did so after concluding that litigation was reasonably foreseeable (to Rambus) by the end of 1998.

In the Hynix case, the district court (ND Ca) concluded that litigation was not foreseeable (to Rambus) at the time of the shredding and so found that there was no spoliation. In the opinion of Hynix court, litigation must be “immediate” or “certain” to be foreseeable.

In the present appeal the Federal Circuit was called upon to resolve the issue of when litigation was foreseeable and so a duty to preserve documents arose. Rambus urged the Court to adopt a standard whereby a party would be obligated to preserve documents only when litigation became “probable.”

In the Micron case, the Federal Circuit affirmed the district court ruling that spoliation had occurred but reversed the district court on the sanction of dismissal and remanded the case for reconsideration of that sanction. The Federal Circuit left it to the district court to determine, based on the totality of the circumstances, the date the duty to preserve arose, but the Federal Circuit did conclude that the duty to preserve did arise prior to the August 1999 shred day and that spoliation had occurred. In terms of the circumstances to be considered (under the totality of circumstances test), the Federal Circuit cited facts such as Rambus’ knowledge of the potentially infringing activity (of Micron), as well as the steps it had taken in furtherance of litigation such as selecting forums, prioritizing targets and creating claim charts. The Court noted that for Rambus, litigation was “an essential element of its business model.”

As part of the remand, the Federal Circuit instructed the Delaware district court to make a determination on the issue of bad faith and to re-assess its finding of prejudice, i.e., in terms of whether, independent of the propriety of Rambus’ document destruction, the shredding had an impact on the ability of potential defendants to defend themselves. In reversing the dismissal sanction, the Federal Circuit instructed the district court to reassess the sanction based on the degree of bad faith and prejudice it found and whether there was another, lesser sanction that would be sufficient.

In the Hynix appeal, the Federal Circuit reversed the district court, concluding that the standard of foreseeability used in that case (“imminent or probable, without significant contingencies”) was too narrow and that even if there are contingencies, so long as their resolution is “reasonably foreseeable,” the litigation is also reasonably foreseeable. The district court was instructed, on remand, to determine (under the same totality of the circumstances test) when Rambus’ duty to preserve arose and whether Hynix was entitled to relief.

Attorney-Client Privilege and Crime-Fraud Exception

The Federal Circuit agreed with both district courts that even though the evidence used to advance the spoliation argument was subject to an attorney-client privilege, that privilege was “pierced” by the crime-fraud exception since the communications in issue were in furtherance of a violation of a destruction of evidence statute (notwithstanding Rambus’ argument that the California statute in question only applied where there was “immediacy of temporal closeness” between the time the destruction occurred and the time set for document production). The Court rebuffed Rambus’ argument, noting that it would make “no sense” given Rambus’ control of the timing of events, to permit a party to intentionally destroy evidence and then just wait some “arbitrary period of time” before filing suit to avoid the consequences of the crime-fraud exception.